Repayment mortgage and Savings interest rates

sponge_3

Interest rate calculation of repayment mortgage and bank savings account, are there any difference? E.g. if I earn 5% interest rate from my savings account, and only pay 4.5% interest rate for my mortgage, am I better off not to pay back my mortgage early? Thanks :rotfl:

Barney088

It depends, great answer for almost every question I guess. It depends on what you want to do. In principle, if you can earn more money on savings than you can on your debts it would be better to keep the money in savings. For example if you have a mortgage of £100K and cash of £100K you can decide what to do with your money. Most people are not that lucky and it would therefore depend on what you wanted to do. If you've come into £10K what would you like to do with the money, if you want to buy a car, then do that, if you want to clear your mortgage off I would be carefull of Early Redemption Charges (ERC) these will give you a charge of x% when you clear off the mortgage early, if only in part. THis is the thing to check first with your lender, this will probably help you make your decisions.

Good luck

silvercar

Check your tax situation. If you earn a headline rate of 5% interest on your savings that is 4% for a basic rate tax payer and 3% for a higher rate tax payer.

Unless you have an offset mortgage, any capital repayment of your mortgage will be difficult to retrieve later.

sponge_3

Thanks for the advice. I guess what you mean is both interest rate calculations are the same, isnt it?

silvercar

I mean if you don't pay tax then a 5% savings rate and 4.5% mortgage rate means you should keep your savings.

If you are a higher rate tax payer then you only keep 3% of a 5% savings rate, so it makes sense to reduce your mortgage as your sacrficing the 3% interest to save 4.5%.

Unless you may need the savings money at a later date.

sponge_3

Thks for the explanation. Since mortgage use APR while savings use AER interest rate, is there any difference between the two?

michaels

No reason you can't keep money in isa / your wife's / childrens names (up to 100 interest each) to avoid tax and benefit from rate differential - some sums

best discoun tracker rate available - 4.25%
Best saving rate available - 5.15%

Suppose overborrow of 100,000 capital with return of 0.8% pa = £800pa - ie worth doing?

kazd

I think this answers my question. I have been overpaying my mortgage by £30 per month (this was the difference between our old rate and new rate). My mortgage is 4.39%, I have just opened a Halifax reg saver (paying 10%) in my sons name and am now saving the £30 in there, and will pay off a lump sum at the end of the year. Does this make financial sense. I was a little concerned because of the cumulative effect of paying £30 per month. So if there is someone out there better at math than me I would be grateful if you could check the figures.

Thanks

silvercar

Paying £30 per month into an accont like the Halifax's 10% one means that not all the money is in the account for the year. So the 10% rate can't be applied to the whole £360. What rate is the money getting before it goes to the halifax? Very roughly, if it is not getting interest before it hits the halifax, your gaining about 5% overall not 10%.

silvercar

michaels wrote:

No reason you can't keep money in isa / your wife's / childrens names (up to 100 interest each) to avoid tax and benefit from rate differential - some sums

best discoun tracker rate available - 4.25%
Best saving rate available - 5.15%

Suppose overborrow of 100,000 capital with return of 0.8% pa = £800pa - ie worth doing?

If your trying to get gross interest on a large capital sum you (a) need to have a lot of patience & organisational skills (b) generate tree-loads of paperwork.

One ISA in your name = £3,000 max, in your wife's name =£3,000 max. children can only get interest of £100 a year each on money from parents before it is taxed as parents income. = £1,200 per child.

That's £7,200 max (£8,400 if you have 2 children....) for getting gross income in a tax year!

michaels

Luckily wife's tax free allowance is about 4,800 (I think currently?)

But 5.15% on 100k is 5150 so would need to make fulll use of isa's etc.